Will the Sony story end in tragedy?

I threw away a pair of Sony headphones a few weeks ago, not out of disgust or carelessness, but because after nearly 15 years of hard service they had finally stopped working. That, in a nutshell, is the Sony story.

Since it was founded in 1946 – emerging literally out of the ashes of World War 2 – Sony has been at the leading edge of consumer electronics.
Innovations and brands like the Walkman, Compact Disc, PlayStation and BluRay have generated tens of billions of dollars and earned Sony a reputation for quality and reliability.

But, roughly since the turn of the century, Sony has been in slow but consistent decline. As new markets like smart phones, e-readers and tablet computers have flourished – markets in which a younger, nimbler Sony might have been a serious player – the company has stumbled repeatedly.

You can see this clearly in the numbers. In its last financial year Sony as whole lost around $5.5-billion – its largest loss ever. The last year in which the company turned a profit was 2008. Even before that Sony spent a decade struggling to return more than a couple of percent of total revenue to its shareholders. And this when competitors like Apple and Samsung are returning more than 20% of revenue as profits year after year.

And yet, in typically stolid Japanese fashion, the company keeps cranking out beautifully finished electronics, and it keeps pushing boundaries. At a Sony event last week I played with its newest product – the magnificent 4K Ultra High Definition TV.

Imagine four normal HD TVs stacked in a square to make one screen. The 84-inch 4K Bravia has as many pixels as all of those TVs combined. With that many pixels on tap the picture is freakishly sharp, detailed and realistic. At R276 000 each, you'd expect something miraculous – and this is definitely a minor miracle of technology.

So, how do we reconcile a company capable of making a TV like the 4K Bravia with one struggling to stay above water financially? Simple: the world has changed, but Sony has not. Making excellent and reliable products is no longer good enough. Just ask Nokia.

What drives profits in consumer electronics these days is software as much as hardware. Apple's ecosystem of applications makes its mobile computing devices (the iPhone, iPad and iPod) both more useful and more attractive to consumers. Samsung, using Google's Android technology, is achieving similar results.

As a dyed-in-the-wool hardware player, Sony has always struggled with software. Even on the 4K Bravia, the user interface smacks of the 1990s. Again, the comparison to Nokia is unavoidable. Sony has failed to grasp how fundamental a change this is, and it is paying the price.

It may be cold comfort, but Sony isn't the only Japanese electronics giant that is struggling. Sharp is currently in talks to sell part of itself to Hon Hai Precision Industry (also known as Foxconn) – the Chinese manufacturer famous for assembling many of Apple's products. The idea of a Japanese titan being swallowed up by a Chinese upstart must sting more than a little.

In Sharp's humiliation we see the other side of this story: competition from below. While South Korean firms like Samsung and LG are muscling into the top of the market, low cost Chinese operators are eating away at the bottom. This relentless price competition has meant that, in the last few years, the likes of Sony and Sharp were losing money on every single LCD TV set they sold.

Of course Sony is much more than just an electronics manufacturer. It makes content such as music and movies and provides both technical and financial services. But electronics are still its bread and butter – accounting for two thirds of its revenues. Without a healthy core, the rest of the business is unlikely to survive long.

Is this the end for Sony? Not necessarily. A company capable of generating $78-billion in revenue in a single year can't just be dismissed overnight. But Sony's leadership need to pull out of this dive soon, or within a decade it will be consigned to the dustbin of history. After all, that's what you do with something once it has stopped working.